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I am about to ask my girl to get married and of course, give her a big diamond ring in the process.  It got me thinking, is the value of that ring income to her or are gift taxes owed when she (hopefully) accepts it?  
- James, Chicago, Illinois

Let me see . . . you are thinking about getting married and your first thought is whether taxes are owed on the ring?  Seriously?  Okay, tax lawyers can be very objective, so here goes . . .

It is a very common misconception to think that gifts generate income to the recipient. There is no income tax implication to the recipient of a gift.  Now, the area can get murky if the recipient was actually required to do something in order to get the “gift.” Quotation marks are used because under those circumstances, the transfer is not a gift, but actually an exchange of value and would be taxable.  But, you do not seem to have those facts present here, so no income taxes.

An individual is entitled to give $12,000 per year to any number of recipients without incurring gift taxes.  If the amount given to one individual exceeds $12,000 in any one year, the amount over $12,000 is a taxable gift, a tax payable by the giver (the donor – not the recipient (the donee)).  Under the current estate and gift tax sections of the Internal Revenue Code, an individual has a life time exemption equivalent of $1,000,000, and incurring gift taxes (again, giving more than $12,000 in one year to one person) simply operates to reduce the amount of the donor’s lifetime exemption equivalent.  Therefore, no actual out-of-pocket taxes are owed until the donor’s lifetime exemption equivalent is reduced to zero; BUT the taxable gift does trigger a requirement upon the donor to file a gift tax return.  There is no requirement for the donee to do anything.

Also part of the federal estate tax since the early 80s, is the concept of the unlimited marital deduction.  This means that an unlimited amount of property can be passed between spouses without any gift (or estate) tax implications.  So, if she accepts your ring in the same year you get married, the value of the ring becomes irrelevant.

An interesting question in all of this is what happens if she accepts the ring but doesn’t marry you.  The tax law looks to the law of the state in which the situation occurred for the tax result.   In some states, an engagement ring is a conditional gift that is to be returned if the wedding does not follow.  Under these facts, no gift tax would apply.  But in other states, the presentation of an engagement ring is considered a completed gift (particularly so if presented in connection with another observance, such as a birthday or Christmas) that the recipient is entitled to keep even if marriage does not follow.  Under this set of facts, gift taxes would apply IF the value of the ring exceeded $12,000 in 2008.

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